Dr.Mahathir Mohamad:
Operation success

The Malaysian recovery is not to be equated with the revival seen elsewhere in SE Asia.  For it comes with stable prices and low unemployment.

The choice of an economist for the Nobel Prise has always been controversial.  The two economists, who shared the prize two years ago, brought the world to the brink of disaster.  By lending their names to a hedge fund that tries to follow their precepts.

The situation was saved by the US administration, which ate the humble pie.  Rubin, Greenspan & Co. put on hold their free market ideas and quietly mounted a rescue operation.  A few banks were made to chip in, tempted by an offer to cut interest rates as quid pro quo.

Intellectual dishonesty? That question never had any straight answer.  In the free-market scheme of things, the Long Term Credit Management (LTCM), as the hedge funds was called, should have died a natural death.  Like other inefficient firms across the world.

The mystery surrounding the fire-fighting operation may never be unwrapped.  But, long before the LTCM saga unfolded, one man saw the real epicentre of what is known as SE Asian currency crisis.  He blamed it on the speculative leviathans.  And stood his ground.

It was Dr.Mahathir Mohamad, prime minister of Malaysia.  The gurus and pundits in US and Europe cried foul when he put currency controls in place.  Central to the fortifying measures was the decision to fix the rate of ringgit to 3.8 per to the US dollar.  The Malaysian currency, outside Malaysia was declared worthless and the trading of Malaysian stocks in Singapore was banned.  An exit tax system effectively halted the outflow of capital.

Now it is hypothetical argue what would have happened if these steps were not taken.  According to one estimate, $8.4 billion worth of ringgit were outside Malaysia, mostly in Singapore.  Inside there was only $5.25 billion.  In fact Singapore was drawing away Malaysian money, offering very high interest rate.

Looking back, it was no easy job.  Even for Dr.Mahathir Mohamad, perhaps the most charismatic leader in SE Asia.  For the free traders kept up the barrage and his own cabinet colleagues were not willing to go along with him.  Fearing the possible international reactions.  They confronted him with a list of 42 reasons why his currency controls could not be adopted.  They fell in line only after he had satisfied them with his explanations.

All the same, the standard bearers in the US were out to divert attention.  Till baht, the Thai currency, went under, the SE Asian miracle was exhibit No.1 of the free market school.  The moment the tide turned they dropped it as hot potato.  Cronysim, reckless spending and high gearing rations, they howled, wrecked the tiger economies.  That they all were for it for long was forgotten in no time.

Mahathir pointed to the destructive role being played by the currency speculators.  In the name of free trade, speculative hounds were being let loose, he argued.  Such indiscriminate speculation for speculation sake, destabilised the emerging markets.  Mahathir was on a strong wicket.  Even mighty nations fall prey to speculative jabbings.  A typical example is Great Britain.  Single handedly, George Soros ousted it from the European Monetary Union.  It was a different story that the $2 billion profit he made then was lost when the Asian currencies wilted.

Far from being overawed by the might of currency traders and his adversaries in Washington, Mahathir struck back.  Unfortunately his personal equations with his deputy and heir-apparent got entangled with the larger issues.  As a result Mahathir had to fight a sort of pincer movement.  But he was unsparing in this counter attack.  He warned the people of Malaysia against the power play by the colonialists and their agents in Malaysia.  He called them “ethnic Europeans” who thought the Asians could not succeed, their skin colour being brown.  He saw the IMF as representing everything big, bad and disturbing.

On the record, it took less than a year for Malaysia to turn around.

Early this month, Mahathir had many things to boast.  Speaking on the anniversary celebrations of capital controls, Mahathir was far from apologetic.  He asserted that the sliding scale system of levies on the repatriation of foreign portfolio investment cost no harm to the economy.  The question of revaluing the ringgit arose only if the other Asian currencies devalued heavily.  Behind the fixed rate, the government would boost economic growth via a home ownership campaign and more incentives for car sales.

Borrowing the vocabulary of advanced economics he wanted all to see how Russia and China fared in embracing free-market ideology.  Russia is doing badly because of its accelerated drive into a free-market economy.  China, which moves slowly along, is better placed.

It was a hard-hitting speech.  He returned to his attack on currency speculators for sending Malaysia into its deepest recession in decades.  Could not free-market exist without currency trade?  He asked.  Currency dealers impoverished millions of people but not a word came from anybody in the Amnesty International.

Meanwhile the Malaysian recovery is not taken at face value.  But Mahathir is ready with his answer.  According to the terms and conditions set by the western economists, Malaysia has had a “massive recovery”.  As per rules recession is defined, as two consecutive quarters of negative economic growth.

If that is the basis, Malaysian economic recession has come to an end.  Its GDP grew 4.1 per cent in April-June after contracting 1.3 per cent in January-March.  For the whole of 1998, it was a negative 6.7 per cent.

Quite a number of independent analysts are ready to countersign Mahathir’s progress card.  The GDP growth rate is expected to hit close to 2 per cent in 1999.  It is above average even if the projected increase of 2.2 per cent in population.  From 4 per cent and 5.3 per cent respectively, unemployment and inflation have come down to 3 per cent and 2.8 per cent.

One sign that there is plenty of cash around is in the rising car sales.  The central bank had been able to vacuum up $10 billion or more in bonds this year without difficulty.  That liquidity overhang is well reflected in the buoyancy of the Kuala Lumpur stock market.

But critics still shell the success story.  Malaysia is paying dearly for its removal from a global credit rating agency’s capital index.  (Another imperialist ploy?)  KL’s first sovereign bond issue in nine years was over subscribed by 30 per cent.  But Malaysia paid 90 basis points premium over a similar South Korean paper.  Ostracised by the credit rating agency, the inflow of foreign capital is not upto the mark.  That is also one reason that the stock gains are less spectacular than Thailand or South Korea.

The claim that Malaysia did well under the capital control regime is also disputed. From outside, it is no major gain.  For Thailand and South Korea have also reached the main road to revival without sacrificing the free-market system.  But Mahathir’s spokesmen are not cornered.  Mark, Malaysia’s problems caused no social pain, they insist.  And, more important, Malaysia’s recovery comes with its backbone intact.  It never sought IMF help.

It is not denied that the country has miles to go.  Banking is one area where the government is tying itself into knots.  The blueprints produced so far in this respect have not passed the test of public opinion.  Corporate restructuring still remains a dream.  Perhaps the ever so many political distractions (Anwar’ trial in the first place) and the proximity of general elections should explain the slow, or nil progress.

Mahathir’s is no unalloyed triumph.  But his score is definitely high.  He came in the way of Malaysia being converted into a playground of hedge funds and MNCs.  In both Thailand and South Korea they are calling the shots.  In the former, the weak currency has helped brothels to do more business.  In the latter, the growing number of unemployed is going tear up its social fabric.

It is, therefore, too early to say whether Malaysia is out of the woods.  But Mahathir has won the first round.  None would now say that Malaysia is “kaput” (finished).  The next round will depend on so many things.

To get back to the suggestion of Nobel Prize.  Its aura has waned.  It’s indeed hard to pick just one (or two), economists from a long line of claimants.  The field being vast and complex.  After Kenneth Arrow, Paul Samuelson and Milton Friedman, the choice became hundred per cent arbitrary.

Last time, the Swedish academy played safe with Amartya Sen. To cover up its debacle with the two mathematical economists (hedge-fund fame) earlier.

All said and done, the choice of the candidate for its prize is the Swedish academy’s prerogative.  Of late, however, it is a fact that it has reduced itself to a laughing stock.  Given its knack for flushing our economists from their cherished obscurity.  And foisting them on the rest of the world.

It is different thing that Mahathir can and will do without a prize from the Swedish academy.  It is well known now that the academy will only play ball with the establishment.  But if the search is on for a profile in economic courage, Dr.Mahathir bin Mohamad will make a right candidate for the prize.

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